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Super HEROes and PACE Loans… Owners & Buyers Beware

Free money is always an alluring thing; and it takes a while to believe that “there is no such thing as a free lunch.”  And have you ever heard the phrase: “We’re gonna be in your neighborhood helping your neighbors get free (or inexpensive) energy efficient improvements.  Can we come by and give you an estimate?”

There are two popular programs that people use to add and upgrade to their home: The HERO Program is an energy efficient financing program in the United States; HERO stands for Home Energy Renovation Opportunity.  The mothership is known as “PACE: Property Assessed Clean Energy (PACE) which is a means of financing energy efficiency upgrades or renewable energy installations for residential, commercial and industrial property owners. … PACE can also be used to finance leases and power purchase agreements (PPAs).”

Simply put, these programs work by adding the payments of the loan onto your property taxes. The two main PACE financiers are Renovate America and Renew Financial.  Typically a 20 year repay, $3.6 billion was loaned last year for these renovate and tax loans.

Doing due diligence is incredibly important here. PACE/HERO tend to have some control of which contractors and such are hired to do the job. A good amount of the time this means that the home owner doesn’t get to shop around and find a fair market value on their upgrades resulting in quite an inflated cost. It is also becoming all too common for seasoned seniors who used PACE to upgrade their homes to lose their homes because of it…  Too many are being forced out of their homes because they are on limited or fixed income and can’t afford the increase on their property taxes for the windows or concrete upgrades. 

One example a local lender provided was a $70,000 price tag (for maybe $30,000 worth of work): all financed thru PACE loans.  It involved concrete and drought tolerant plantings on a small lot. When they saw their first tax bill, with a $7000 add on for clients on low income, they about died from the sticker shock.

The problem for seniors and other owners dawns often when they see that first property tax bill.  And that’s just the beginning…

You don’t pay your taxes monthly unless through an escrow account for taxes and insurance.  Normally, you pay half each, with the two annual prop tax payments on April 10 and Dec 10.

If you don’t pay, because you are choosing between taxes and tamales or other luxuries like food and gas, you get penalties.  Expensive penalties…

Note:  these are “breath on a mirror” loans.  No equity check nor debt ratio and you can borrow up to 15% (10% up to $700k home value).  Also, it is NOT deductible since it is repayment of improvements NOT property tax.

All these temptations leads to a growing problem: strapped new homeowners as well as seniors who get sticker shock in October when the tax bill comes due. Think about it: you get behind on your taxes, and the assessor will penalize you 10% for a late bill AND, to add salt to the wound, 18% per year (1.5% per month) penalties on the loan. What’s owed can grow exponentially. All for that drought tolerant lawn or windows that don’t pay you a monthly dividend like solar can.

Triple whammy: if you are forced to sell to prevent foreclosure or just because it’s time, Freddie Mac and Fannie Mae are out, FHA now as well. You have to pay off the outstanding debt in escrow: $50K? $70K?   You could be upside down, especially if the tax penalties are accruing, even with the positive market value increases since 2011. 

Call with your questions: we can help if you are in this situation.

There can be some situations where the loan helped out the owner, but it takes a lot of planning and knowledge on the part of the home owner.

When looking for a home for my niece and nephew in law, we found a great home in Norco that had solar.  I spent considerable hours talking to the current owners (who knew little about their two year old system) and the contractors and HERO/PACE people.

The PACE related upgrades for my Norco clients involved solar only; and Norco is an area of high summer heat AND rising electricity costs.  The jury is still out on the decision but in this case, there is visible returns on their decision. They have been selling energy back to the grid but again, this is no lottery: look for the devils AND angels in the details.

Suggestion:

GET AT LEAST TWO OR THREE BIDS FROM CONTRACTORS.  YOU WILL BE AMAZED.

Often, the contractors have a captive audience, you! The cost of the improvements may be a third or twice as much as if you are paying cash. The dirty secret is you ARE paying cash!  They get paid thru PACE and generally cashed out (except for solar)

Kids, tell your parents NOT to do this without a family conference; seniors are targeted by cell centers, neighborhood walkers and more.  Get multiple bids and ‘buy’ only what you need.  Solar has some payback but even then, you often are paying for the power over time if leased.  You could own the equipment but pay for the “access”

Super HEROes can become a villain in a hurry.  Don’t risk your home without some serious effort to know the facts.

Committed to helping you with your real estate needs, wants and questions.

Len Beckman
Broker/Owner of M3RealEstate

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Your Capital Gains may NOT be Taxed; Ask Me How!

A client recently asked when he and his wife should use his one time $125,000 over age 55 capital gains tax protection; they were approaching their mid 50s. To his surprise, I told him since 1996, you can keep the first $500,000 in real property “lottery winnings” when you sell your home, and do this every two years.  I googled and found that you can get 1990 (older) articles still talking about this outdated information on capital gains!

We talk about the laws, but what exactly are capital gains…? It’s about gaining capital, right? Not exactly… Simply put, “capital gain” refers to the profit you gained after selling your property (or investments, stocks, etc.).  There are varying tax brackets depending on income level and whether it was short-term or long-term, and in the case of selling your personal residence that little percentage change can make quite a difference (this is also why knowing your tax basis on your home is important when you are trying to sell!).

Regarding your home:

That “one time” rule of capital gains is long gone, yet often people hear it from a friend of their neighbor’s third sister, who’s married and read some where….  you get the drift.  Ask a professional, or call with questions! Buying and selling real estate are epic, life changing events and should be done with ALL the pertinent information.  Acting now or doing absolutely nothing both could be the right answer at this time in your life, but how do you know which it is?

The “new” tax law can be found here on the IRS website, but simply put:
“If you meet certain conditions, you may exclude the first $250,000 of gain from the sale of your home from your income and avoid paying taxes on it. The exclusion is increased to $500,000 for a married couple filing jointly.”  ~Publication 523 Cat. No. 15044W of the Internal Revenue Service (IRS)

Here’s an example:
The Smiths bought 123 4th street for $300,000 in 2011; today it is worth $700,000. That equals $400,000 in capital gains. Married, they get to exclude up to $500K (of the $400K), meaning they had no capital gain tax!  Single, Mr. Smith would exclude the first $250K, meaning he had $150K left waiting to be taxed.

However, you can also factor in selling costs, buying costs, and improvements to cut the capital gains taxes. Your tax basis or basis to compute the tax goes up (a positive thing!) with improvements like a home addition, pool, etc; basic maintenance isn’t necessarily usable. The costs of selling, like title, broker fees, and escrow, reduces the sales price. Together you get a number that you must report the next tax year. If the “gain” is less than 250/500K, dependent on single or married, you pay ZERO cap gains tax on the sale.

Of the eligibility rules, there is an “ownership requirement” that states that the home being sold had to be your primary residence for two of the last 5 years.  And it need not be continuous, but cumulative. Eligibility rules can be found in more detail starting on page three of the IRS document mentioned above.

Why should you care? If the Smiths hadn’t had a capital gains exemption, they could have been paying tens to hundreds of thousands of dollars on the federal and/or state level (depends on your income tax bracket).  Buying and selling a home is best done with a level head and all the facts.  We topped out in values in 2007-8; then the so-called mortgage meltdown.  Short sales, losing homes, misery AND opportunity.  Come 2011 or so, we hit home values bottom here in Southern California.  Since then, the last 7 years has seen the rebound in values.  Many homes purchased since 2005 are worth more, from $1 to hundreds of thousands.  Doing nothing IS a decision… so is planning ahead.

Is it time to sell? If it is, note that a dollar in a bank called “bank” or a bank called “home equity” have equal paper value until you do something; of course, the bank dollar is more liquid but inflation is eating away at it.

The bank dollar gathers a couple per cent interest (rates are rising, but savings rates do go up like mortgage rates), a good thing and savings for another day; the equity dollar, in fact up to $500,000 (adjusted up and down by improvements and costs of sale & purchase) of them, can be converted to gold, silver or ?? upon sale with NO tax exposure.  And it may be time to sell; demand has softened, but values are still up.

I am not a real estate attorney or CPA, so I do recommend your tax guy gets your call for details.  He or she knows your particulars, but this factor can mean turning your equity gold into a new home, trade up or go smaller, keeping or using some equity free of taxes for other purposes, increasing or changing your asset picture, etc.

I STILL make house calls.

Len Beckman

Broker/Owner of M3RealEstate

 

LOOK FOR OUR NEXT POSTING: HOW CAPITAL GAINS AND 1031 WORKS FOR YOU ON RENTAL/INVESTMENT PROPERTY